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KazMunaiGas: Moving Up the Ranks

Posted on January 25, 2011 by KazCham

With its strategic investment plans and refinery modernization programs, KazMunaiGas is set to become one of the world’s major oil industry players. Birgit Brauer reports

KAZAKHSTAN’S NATIONAL OIL and gas company KazMunaiGas (KMG) is a big-time player in the region, but not yet so well-known elsewhere. That will likely change in the next few years as the company plans to grow to match the international majors with an ambitious strategy to develop and expand exploration, production, refining, transportation, and marketing.

KazMunaiGas, the flagship company of Kazakhstan’s economy, accounts for every tenth tenge of the state’s revenues, according to KMG Board Chairman Kairgeldy Kabyldin. KMG is Kazakhstan’s second-largest oil producer after Tengizchevroil and intends to become one of the top 30 oil producers in the world by 2015.

It’s already on its way, as can be seen in this year’s ranking of the world’s top oil companies by Petroleum Intelligence Weekly. Just one year after making it onto the list for the very first time, KMG ranks 41st out of 130 companies, putting it ahead of Devon Energy and

Hess of the United States and Britain’s BG Group.

KMG plans to invest as much as $4.5 billion a year to produce 25 million tons of oil annually by 2015 and to modernize the country’s three refineries: Atyrau, Pavlodar, and Shymkent. This also includes up to $2.5 billion a year for the giant Kashagan oil field, which it holds with other international oil companies, including ExxonMobil and Royal Dutch/Shell. This year, KMG is seeking to borrow $2 billion for the Kashagan project. The national wealth fund, Samruk-Kazyna, which owns KMG, is considering a share sale within three years, perhaps through a public offering.

Partly due to acquisitions, KMG has come a long way since its founding eight years ago. KMG had been eager early on to break into the lucrative European market and to develop assets abroad, but initial attempts failed. When it tried to gain control of Lithuania’s Mazeikiu Nafta refinery in 2006, it was outbid by a Polish company. One year later, KMG finally bought 75 percent of Romania’s second largest oil company, Rompetrol Group, which gave the company access to two Romanian oil refineries and a vast retail network of 630 gas stations in seven European countries, including France, Spain, and Ukraine. In 2009, KMG spent a total of $3.7 billion acquiring assets, including the remaining 25 percent in Rompetrol and a controlling stake in the Pavlodar Oil Refinery.

At home, KMG was gradually granted substantial preferences by the Kazakh government, enabling it to become the national champion and a formidable competitor for multinational oil companies within the country. KMG has the first right of refusal on any sale of assets and pre-emptive rights to offshore fields. It is entitled to 50 percent of shares in any new oil and gas development in the Caspian Sea.

KMG’s growing role has not been to the liking of some of the international oil companies operating in Kazakhstan. However, it has given Kazakhstan a much stronger bargaining position on existing and future oil projects and put paid to sometimes angry public debates about the country being taken advantage of by greedy foreign oil companies.

Over the past two years, KMG has signed a number of memorandums of understanding with international oil companies. One of them is a production-sharing agreement in June 2009 with ConocoPhilips of the United States, and Abu Dhabi’s Mubadala Development Co. to tap the Nursultan Block (also known as N Block) in the North Caspian. KMG holds 51 percent of the block, while ConocoPhilips and Mubadala each have 24.5 percent. The two foreign firms paid Kazakhstan a $100 million signature bonus and will finance all exploration costs. Kabyldin said at the time that the project would enable Kazakhstan to use new technology and international expertise in developing its offshore oil and gas.

KMG’s growing importance was further underscored last year when China’s sovereign wealth fund acquired an 11 percent stake in KMG’s London-traded unit, the subsidiary KazMunaiGas Exploration & Production (KMG EP), by purchasing global depositary receipts for $939 million. KMG EP made international headlines in 2006 when it raised approximately $2 billion in an IPO and has seen dynamic growth since. But the fall in world oil prices ate into last year’s profits. In 2009, KMG EP’s net profit fell 13 percent to $1.4 billion due to lower oil prices and higher taxes following the introduction of a new tax code over a year ago.

A presidential decree in March 2010 creating a new Ministry of Oil and Gas marks the beginning of a new stage for KMG’s development. The ministry took over the regulatory role of the oil and gas sector, previously largely exercised by KMG, and left the company to focus solely on the commercial aspects of the industry.

How this division of responsibilities will work out in practice is not yet clear. But there’s little doubt that KMG will soon be a name known around the globe. ?

Birgit Brauer, Ph.D., is The Economist correspondent in Almaty, where she has lived and worked since 1996. Her book on the oil sectors of Azerbaijan, Kazakhstan, and Russia is to be published by Palgrave in 2011.

Source: Invest in Kazakhstan

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